The price of domestic gas is expected to go up from existing US$ 3.21 per million British thermal unit [mBtu] [on net calorific value basis] to US$ 3.40 per mBtu for six month period beginning April 1, 2018. The hike taking the price back to the level reached two years ago – has brought to the fore some niggling questions which successive ruling dispensations have dodged for several decades.
First, who pays for the extra price that user industries – mainly fertilizers [besides power, CNG and PNG] – shell out?
The urea industry alone requires over 45 million standard cubic meter [mmscmd] of gas as against total domestic supply of 90 mmscmd. The maximum retail price [MRP] of urea is controlled at a low level unrelated to its cost of production which is higher. The excess amount is reimbursed to manufacturers as subsidy. When, the price of gas goes up leading to increase in production cost, this leads to corresponding hike in subsidy as MRP remains unchanged.
Under this arrangement, subsidy on urea has increased leaps and bounds and currently stands at Rs 45,000 crore [budget allocation for 2018-19] in total fertilizer subsidy of Rs 70,000 crore [balance Rs 25,000 crore is on non-urea fertilizers viz. DAP, MOP, complexes etc]. With every round of hike in gas price, the subsidy pay-out goes up.
All governments irrespective of their political color have bemoaned increase in fertilizer subsidy and its destabilizing effect on the fiscal situation. Yet, they have refrained from addressing the generic causes behind increase in it viz. low MRP on one hand and increase in cost on the other. On several occasions in the past, even when MRP was hiked, it was rolled back – either wholly or partially.
Second, despite the supply and pricing of gas having a strong bearing on the production cost and in turn, subsidy on urea, it has not received the attention it deserves.
The urea industry depends on import for 35% of its gas requirement [as it gets only 1/3rd of total domestic supply] which under the current tight global demand-supply scenario comes at thrice the price of domestic gas. At plant site, imported gas would be about US$ 12 per mBtu as against domestic gas costing about US$ 5 per mBtu. The weighted average cost would be US$ 7.5 per mBtu [12×0.35+5×0.65]. At this rate, the gas cost alone would be Rs 11,700 per ton urea – more than double its existing MRP of Rs 5360 per ton.
Even when, more of domestic gas is available, that would be at a much higher price. This is because the additional gas will come from more difficult, deep/ultra deep and high temperature/high pressure fields for which government has allowed higher price based on alternate fuels viz. naphtha, fuel oil, LNG etc. In any case, gas is unlikely to flow from any of such fields within the next 3 years or so.
Inability to secure gas supplies at low price [despite Modi – government’s efforts to renegotiate gas contracts] juxtaposed with low MRP leads to ever increasing gap between the cost and price, in turn, ballooning subsidy.
The way forward is intensified exploration and development efforts to get higher volumes of domestic gas to make production economical even at lower price. Higher volume holds the key as without it, the field would be uneconomical despite higher price. Yet, the irony is that oil and gas companies are hankering after higher price only and the government is yielding. This is not a sustainable option.
Third, despite much talk about reducing urea use to promote balanced fertilizer use, not much is happening on the ground. The clarion call by Modi to cut urea use by 50% within next 5 years lacks seriousness. If, that were the real intent why would the government concurrently take steps to increase domestic urea capacity.
The current urea production is about 24 million ton annually as against consumption of 32 million ton. If, urea use is to be reduced by 50% or to 16 million ton, there will be surplus of 8 million ton. This is without taking cognizance of plugging the leakage consequent to need coating of urea which is now mandatory. With this adjustment, the surplus urea will further increase.
In view of the above, it makes no sense to proceed with revival of plants under Fertilizer Corporation of India [FCI] and Hindustan Fertilizer Corporation of India [HFCL] viz. Sindri, Gorakhpur, Talcher, Ramagundum and Barauni which together are expected to add 7.5 million ton annually. Given the high investment on revival of these plants and high gas cost leading to high production cost, selling the surplus urea in international market won’t be easy either.
Fourth, under the extant new pricing scheme [NPS], urea manufacturers get unit-specific price/subsidy which protects high cost/in-efficient units and gives no incentive to low cost/efficient units. In 2012, a group of ministers [GoM] under then, agriculture minister, Sharad Pawar had approved switch over to uniform pricing – similar to nutrient based scheme [NBS] for non-urea fertilizers. But, this is yet to be implemented.
Sans uniform pricing, it is not possible to build a fertile ground for latching on to a market driven system which is a sine qua non for competition, high efficiency, low cost and R&D – driving the industry towards sustainable growth. Without it, even the potential benefits of DBT [direct benefit transfer] will not accrue.
Post – May 2019, the new government will need to address these challenges head on. It will have to work on a holistic policy to pave the way for (i) adequate supply of domestic gas at ‘affordable’ price; (ii) de-regulated/market driven fertilizer industry; (iii) DBT of fertilizer subsidy to poor farmers and (iv) balanced fertilizer use.